Forcing the pace of construction disputes; use but don’t abuse statutory demands


Introduction

A number of Australian States have legislation to ensure that disputes arising under construction contracts do not stop the timely payment of progress payments.  Generally speaking, the legislation provides a process for a rapid resolution of certain payment disputes.

In Western Australia, where the relevant legislation is the Construction Contracts Act 2004 (CCA), this process is called adjudication.  A finding that a payment must be made is called a determination, and it gives rise to an enforceable debt payable by the principal under the contract. .

This is not the end of it; a progress claim can still be disputed in the courts or by arbitration in the normal way, but a determination requires that the progress payment be paid in the meantime.  It has been described as a “pay now, argue later” system, the purpose of which is to ensure that the flow of money to contractors and sub-contractors in a construction contract cannot be held up solely by the principal’s assertion that there is some reason why they should not pay.

Determinations and statutory demands

In WA an adjudication must be commenced within 28 days of a payment dispute arising, and there are then strict time frames leading to the delivery of a determination by the adjudicator.  If a payment determination is made, the beneficiary of that determination can apply under section 43 of the CCA to a court for leave to have the determination entered as a judgment of that court. This enables them to invoke the normal procedures for enforcing a judgment such as the seizure and sale of assets.

Sometimes the beneficiary of a payment determination will use a statutory demand.  As many readers will know, a statutory demand is a device created under the Corporations Act to make it easier for creditors to establish that a company is insolvent.

If a creditor serves a statutory demand on a company, it has 21 days in which to either pay the money or apply to set aside the statutory demand. To succeed in an application to set aside a statutory demand, the recipient of the demand must show that there is a genuine dispute about the debt, or that it has an offsetting claim.  The court may also set aside a statutory demand if a defect in the demand will cause substantial injustice if it is not set aside, or there is “some other reason why the demand should be set aside”.

A determination under the CCA coupled with a statutory demand is a potent strategy to either recover money or rapidly establish the insolvency of a company against which a determination has been made.  Perhaps because of this, there have been a number of cases about the interplay between CCA determinations (or their equivalent under similar legislation elsewhere), and the statutory demand procedure.

Two recent Western Australian cases have clarified some aspects of this interplay but have also revealed some important pitfalls which must be avoided if the above strategy is to be used successfully.

How to do it: An underlying dispute is not a “genuine dispute”

In April of this year the Western Australian Court of Appeal considered the case of Diploma Constructions (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91, in which KPA provided certain architectural and consultancy services to Diploma in relation to a shopping centre redevelopment.  KPA issued batches of invoices in October 2012 and January 2013, each of which gave rise to a “payment dispute” under the CCA, and which resulted in KPA obtaining two separate determinations against Diploma.

In February 2013, Diploma issued District Court proceedings alleging negligence, among other things, and claiming loss and damage totalling $287,905.40.

KPA applied for, and was granted, leave under section 43 of the CCA to enforce its two determinations as judgments.  It then used these judgments to issue a statutory demand in August 2013, for a debt totalling $504,548.29.

In trying to have the statutory demand set aside, Diploma argued that it had a “genuine dispute” because it disputed KPA’s ultimate entitlement to be paid the amounts that it had been awarded, on an interim basis, in the determinations.  It also said that it had an “offsetting claim” on the basis of the matters raised in the District Court action.

These arguments failed both at first instance and on appeal.  The Court of Appeal found that a determination created a debt that was presently due and payable, even though it was in some senses an interim decision, in that the underlying dispute could still be pursued by Diploma in subsequent proceedings. Diploma could therefore not point to disputes about the invoices to set aside a statutory demand while the determination was in place.

How not to do it: Failure to obtain leave leads to an abuse of process

On 10 June 2014 Acting Master Gething was faced with another attempt to enforce a determination by using a statutory demand.  In Kellogg Brown & Root Pty Ltd v Doric Contractors Pty Ltd [2014] WASC 206, Doric obtained determinations with respect to two invoices totalling $1,010,508.50; however on this occasion KBR disputed the jurisdiction of the adjudicator to make the determinations, as well as raising an underlying dispute about the invoices.  Doric issued a statutory demand for the amount of the determinations but did not first apply to the court for leave to enforce them as judgments of the court.

The Acting Master found that a party cannot use the statutory demand procedure unless it had first successfully applied to the court under section 43 of the CCA to enforce the determination as a judgment.  Furthermore, Doric’s failure to first make this application under the CCA meant that its subsequent use of the statutory demand procedure to enforce the determinations was an abuse of process; the Acting Master’s judgment on 10 June 2014 canvassed the possibility of an indemnity costs order being made against Doric but this was to be the subject of further submissions from counsel.

Disputing the adjudication can give rise to a “genuine dispute”

In his judgment the Acting Master considered a number of other issues.  He followed the Court of Appeal in Diploma Construction in finding that KBR’s dispute about the invoices could not constitute a genuine dispute for the purposes of setting the statutory demand aside.  However, he found that there could be a genuine dispute if the validity of the determination itself was the subject of a bona fide challenge, such as KBR’s contention that the adjudicator had fallen into jurisdictional error.

A word of caution

The decision in Diploma Constructions (WA) Pty Ltd v KPA Architects Pty Ltd should be carefully considered by anyone who is thinking of enforcing a CCA determination in Western Australia. The judgment considers many of the different arguments which can be raised for and against the use of statutory demands in these circumstances, and even to the extent that it is not binding, the reasoning in the judgment may well be adopted in future cases.  Using a statutory demand to enforce a determination can be a very effective strategy but is a risky one if not guided by expert advice.

For inquiries regarding insolvency or building and construction disputes, contact  any member of the commercial dispute resolution team at Kott Gunning on 9321 3755.

The information published on this website is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.